Minnesota companies revolt over call to end tax-free business transactions

FILE: Oct. 29, 2012: Shown here are a hotel manager and supervisor at a hotel in Douglas, Arizona. (REUTERS)

Minnesota businesses are blasting a plan by Democratic Gov. Mark Dayton to make the North Star State one of the few that taxes companies for business they do with other businesses.

Firms in the state say the plan to tax such business services as advertising, legal advice and even printer fees will dull their competitive edge, in addition to adding perhaps thousands in extra costs a year.

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The proposed 5.5 percent tax would be imposed on business-to-business services. It's just part of a larger package of increases that Dayton has proposed to help trim the state’s $1.1 billion budget deficit.

Dayton supporters say the governor’s plan to also lower the corporate rate would help offset the new tax and stimulate economic growth.

But companies, particularly smaller businesses, think they’ll get hit in several ways.

They say larger companies can sidestep the tax by using in-house lawyers or marketing staff, instead of having to pay a nearly 6 percent premium on the money they would pay an outside firm. The smaller businesses say they don’t have that option and cannot absorb the additional costs as easily.

Opponents have also argued that companies bidding on a New York company’s ad campaign, for example, could lose because the tax would add significantly to the price of their bids.

The Dayton administration said last week the tax would not apply to goods or services sold outside of Minnesota.

But the state Chamber of Commerce, which representing roughly 2,400 business, remains opposed to the tax and wary of the clarification.

“We’re still looking for the details,” Olson said.

Dayton originally projected the tax would raise an additional $2.2 billion, but his administration purportedly has acknowledged critics’ arguments that the number fails to take into account some companies figuring out how to avoid paying.

When announcing the broader tax plan – which also includes taxing the investment income of part-time residents – Dayton acknowledged the increases would sting.

"No one likes paying more taxes, even when necessary to make them fair," he said during his State of the State speech this month.

However, the changes -- which include lowering the state sales tax -- would make the system fairer, provide extra revenue to cut the deficit, fund education and provide homeowners with a tax rebate, he said.

Hawaii, New Mexico and South Dakota have been collecting sales taxes on professional services for decades. But the tax is rare. Florida passed similar legislation in 1987 but repealed it six months later amid a hail of criticism, according to The Star Tribune.

Olson said a state report due out next week is supposed to show better-than-expected revenue forecasts, which has some people thinking Dayton might pull back on the business tax.

“But I’ve been in this business a long time, so I don’t take anything for granted,” he said. “I think the governor has shown us the direction he wants to go.”